Pricing the Internet Geoff Huston
Issues Covered Cost Identification Pricing Policies
Cost Identification Cost elements for an Internet Service technical staff operational and support staff administrative overheads capital equipment data transmission costs domestic line leases international line leases ISP transit costs
Cost Profile - non US Typical recurrent costs national backbone carrier non-us staff & admin 10% domestic leases 30% international leases 60% international transit <1%
Cost Profile - non US Intn'l Transit 1% Staff & Admin 9% Domestic Leases 30% Int'nl Leases 60%
Cost Profile US profile has proportionally: lower international lease cost ($0!) lower domestic lease cost higher relative support staff cost
Cost Profile - US typical recurrent costs access provider non-backbone non US customer support and marketing 50% access infrastructure 20% domestic access to backbone 25%
Cost Profile - US backbone access 30% customer support & marketing 50% access infrastructure 20%
Cost Profile - Backbone Net Determining the unit cost of passing traffic over the network sum of unit costs for traffic over each circuit normalised by average end to end traffic profile
Cost Profile determining the unit cost of passing traffic over a circuit bidirectional or unidirectional? line occupancy pattern (peak to average) average sustainable line occupancy Dial server usage pattern Business usage pattern 0 12 24
Cost Strategy avoid congestion on the circuit as a priority (actual unit cost of delivered data) Unit Cost 20% 40% 60% 80% Average Traffic Level
Cost Strategy leased circuit cost circuit lease cost must be fully defrayed at average circuit occupancy of 55% for a stable operating network. higher average occupancy is possible at the cost of peak load inefficiency lower average occupancy is undersubscription of the circuit resource.
Worked Example 2Mbps circuit - lease cost of $150,000 per month unit cost of data is 28.2 cents per Megabyte
Worked Example 2Mbps can deliver 663,552 Mb in each direction per month Total possible traffic level is 1,327,104 Mb in both directions 40% target line occupancy is 530,842 Mb $150,000 divided by 530,842 is $ 0.28
Worked Example International line has double the cost you can t get the other side to pay! From previous example the unit cost of data is 56.4 cents per Megabyte
Cost Profile Example Type Proportion unit cost %total cost of traffic Intnl 65 1.00 89% Dom 20 0.32 10% Local 15 0.08 1%
Cost Strategy minimise International Lease costs tariff structure of decreasing unit cost with longer lease commitment higher volume circuit Note that the Minimum Investment Unit (MIU) of international cable systems is an E1 bearer major cost break leading to E1 size reduced cost break thereafter
Cost Strategy quantity over quality Frame Relay for lower speeds quantity over diversity
Cost Strategy terminate at the cheapest useful full circuit location high volume termination locations are cheaper distance is not a significant factor maximise useful circuit capacity secondary goal avoid the long delay pipe protocol behaviour use cable if marginal premium over satellite is small tend to cable for higher bandwidths
Cost Strategy Minimising International Lease cost is the most significant cost factor Domestic lease cost can be significant similar factors apply here as with International leases
International Access Costs Connection Options Connect to upstream ISP Import default route Contract ISP to advertise your routes to Internet Cost highly variable Quality of default can be variable Purchase carefully!
International Access Costs Connect to an exchange point Can advertise your routes to all exchange peers Can import all announced routes to your network This is not the same as importation of default You need to purchase transit at the exchange point in order to reach other exchange points same conditions apply
Costs and Revenue This is a growth industry Cost containment is subsidiary to revenue growth Effective marketing leads to higher revenue greater purchasing power lower unit costs
Client Pricing Objectives service provision cover costs? generate revenue? constrain / encourage use? competitive positioning
Revenue Generation constrained by policy objective of the network initial revenue levels need to be offset against future growth potential within competitive environment maintain revenue levels in line with investor expectation
Constrain / Encourage Use Must constrain use within a fixed funded or subsidised environment unrestricted growth of subsidised environment implies fundamental business failure within a cross-subsidised environment Must constrain use if increased use does not generate increased funding and / or revenue
Constrain / Encourage Use Should encourage use within parameters of constant or improving income delivered quality of service unit cost of service provision
Competitive Pricing Must set pricing at a level which is comparable to competitive networks set by delivered service profile quality of delivered service investment profile desired return on investment Opportunity pricing is inherently unsafe as a longer term strategy
Internet Service Pricing Unit pricing is variable against target congestion level The discriminent is quality Variable perception of value of quality price of services service degradation
Pricing Elements Access Time & Duration Volume Distance Retail Price = f(access) + g(time) + h(volume) + j(distance)
Access Price Normally varied by bandwidth If used as sole price parameter then the provider relies on averaging across the client base Sophistication of client base implies increased usage at constant price Must be offset by constant growth ie access pricing must be offset by increased marketing costs and / or access to lower unit costs of bandwidth
Access Pricing flat fee based on bandwidth widely used (well, not so now) predictable billing for the customer low administrative overhead for provider increased marketing costs for provider no traffic shaping no incentive for shared caching to offset intnl lease costs
Time-Based Pricing only applicable to dial-up operation scales with growth in dial-up market widely used for dial access monthly access schemes are generally risk prone to over consumption per unit time charging difficult to market as the market matures monthly access plus timed overflow very common
Volume Pricing cannot measure calls Sent or Received traffic? Sent Volume reduces incentive to populate network with services (information provider pays to pass information to receiver) Received Volume matchesftp&htmlusage poor match for email & telnet low incentive for cooperative infrastucture provider undertakes all dns, named, caches, etc
Volume Pricing Decision on Volume unit tens of gigabytes (virtual access bandwidth) megabytes (high sensitivity) Traffic shaping by time of day peak / off peak pricing congestion / burst pricing
Volume Pricing Unit price on received gigabytes per month Off Peak volume discount? increasing adoption within the Internet scaleability allows increasing revenue with increasing use to ensure constant delivered quality i.e. allows constant service integrity
Distance-Based Pricing Typically applied to volumes measured on a source to destination basis: local switching domestic transit international transit requires traffic sniffing (scaling issues) weakly manageable within the client environment
Pricing Conclusions No pricing (funding by external agencies or by multilateral client agreement) is typical starting position, but is very weak Access Pricing is effective starting position, but is difficult to produce a stable outcome under growth pressure Volume Pricing is stable, but requires careful positioning within current / future competitive market
Discussion Marketing Internet Services Cost containment vs revenue growth marketing as a measure to support pricing strategy plan ahead on demand levels, revenue and expenditure Issues of marketing capabilities vs marketing data switching services
Discussion Pricing strategies in a competitive marketplace What s the objective? What s the regulatory position?